Market snapshot: bank events positive but sentiment still fragile

A relief rally on Monday in reaction to news out of the banking sector is welcome, but is it justified? Our head of markets brings you up to speed on latest developments.

US markets shook off a poor start to finish Friday's volatile session higher, as the banking sector saga continued to unfold.

Initially falling after European sessions which had been dogged by pressure on Deutsche Bank AG (XETRA:DBK), the main US indices engineered a sharp turnaround as regional banks bounced. This also followed comments from the US Treasury over the course of the week that they were prepared for further stabilising action if required, and from the Financial Stability Oversight Council that the banking system was “sound and resilient”.

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Quite apart from an inevitable move towards haven assets, there has also been some buying interest in certain “megacap” stocks which should display some defensive characteristics in the event of a recession, should the Federal Reserve overtighten the monetary screws.

While the current consensus is for the interest rate hiking cycle to be paused in May, as yet there is little indication from the Fed that it has any immediate intention of changing tack unless and until it can tame inflation, even if it is nearing the end of its campaign.

In a later move which could provide some stability to sentiment, First Citizens BancShares Inc Class A (NASDAQ:FCNCA) agreed to purchase large parts of Silicon Valley Bank’s assets totalling around $72 billion and at a significant discount. There were also comments from the European Central Bank aimed at smoothing tensions, underlining the strength of banking liquidity and capital positions in the area and also the potential offer of providing liquidity should the need arise.

Leading into the final week of the quarter, investors have witnessed a whipsawing three months of initial optimism and subsequent concern. The main indices have had differing fortunes, with the Nasdaq having been the star of the show in the year to date, albeit after a poor 2022, ahead by 13%. The benchmark S&P500 has added 3.4%, while the Dow Jones is down by 2.7%.

Asian markets were undecided amid the turmoil overnight, drifting lower as investors reflected on the latest banking developments. Meanwhile, a weaker than expected industrial firms’ reading in China dampened hopes that the economic recovery had yet gained traction, while also being hampered by higher commodity prices and weaker overseas demand.

UK markets, on the other hand, reacted positively to the latest round of stabilising effects in the banking sector globally, although sentiment remains fragile. Financial stocks led the rally, with the latterly beleaguered banking stocks among the best performers, although given the recent damage these share prices have much ground to recover. Despite its 3% spike in early trade today, for example, Barclays (LSE:BARC) shares have lost some 25% over the last month.

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It remains to be seen whether this relief rally is justified until such time as the planks of banking uncertainty can be removed once and for all, leading to an improvement in investor confidence which is currently in scant supply. In the meantime, the spike in the premier index in early exchanges has propelled performance marginally back into positive territory, with the FTSE100 now ahead by just 0.2% in the year to date.